Setting fees when starting up in practice

Accountants, of all professionals, are the ones who should be best placed to set their fees so as to cover their costs and generate a sufficient profit, writes Mark Lee.

The challenge when starting out though is that often there are only limited fixed costs to cover, no direct staff costs and only negligible variable costs. As you start to build up your practice how do you decide what to charge?

The historical approach was to focus on what you wanted to earn per hour and then to set an hourly charge-out rate. I sense that few start-up practices can afford to operate on this basis any more.

As one accountant mentioned to me recently: The idea of quoting fixed fees and value based fees isn’t new or revolutionary any more. It’s the norm.” 

This may overstate how far we have come but it does confirm my view that start-up practices need to identify fixed prices for their services rather than quote hourly rates. The only common exception is where...

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Comments
Kent accountant's picture

Tricky    5 thanks

Kent accountant | | Permalink

Now approaching the end of my third year in practice I'm quite comfortable quoting for fees, thats not to say I don't get it wrong occasionally (good and bad).

When I started out though it was a difficult concept compounded by the fact that I went from full time employment to day rate consultancy work to fixed fee accountancy work.

Initially I saw prospects who were paying say £1,000 a year for basic compliance work.

My first thought (to myself) was how the hell can I make enough money charging that amount!?

My first comment to the prospect was " our fees will be £900".

 

So, yes I did often make the mistake of low balling, fortunately though most of those clients were using large regional practices and were paying too much.

I also found that through efficiencies that its relatively straight forward to make a good living from £900 - £1,000 clients provided:

1. You have good systems.

2. You're clear on the services offered.

3. You charge for extras.

I then moved onto menu type pricing (still have the menu cards) which worked well, more so for enabling me to know (from memory without referring to the card) when speaking to a prospect what I would be quoting.

Now, through meeting the prospect, gaining an understanding of their business and the services they want, offering some advice which demonstrates that you can provide them with a good service; then I'm able to quote higher fees that I used to and win the work.

 

brand new    3 thanks

jored89 | | Permalink

Hi we are starting out offering paperless solutions using xero and receipt bank just looking at which payroll add on to use just quoting your up for new clients. Have found it easier to attract new start ups who are attracted by the cloud and new technology but much harder for potential clients who are with the. Old style more traditional high street practices intending to advertise through social media to find clients all suits me well as I had a stroke nearly four years ago now and finding resultant disability quite restricting in getting a new job. I am really finding myself less disabled up in the cloud, but hints and tips welcomed
Thanks
Jo

Pricing Technique    4 thanks

chatman | | Permalink

I use the method described by another AWeb contributor, which as as follows:

"You’re in the meeting with the prospect; you’ve created an excellent impression and they are falling over you begging for an engagement letter (okay, I might have exaggerated slightly!) and just want to get the price agreed before they leave excitedly to go and tell their co-directors about the fantastic new firm of accountants they’ve just engaged. At this point your throat becomes dry; your hands shake; you look at your shoes; cough and then as the previous respondent says, stick a wet finger in the air. After ummming and arrrring for a while, followed by a few sharp intakes of breath (well...that’s what the guy in the garage does…and he does lots of pricing!) you finally think of a number. It’s not as much as you’d really want but you couldn’t possibly ‘get away’ with any more… Then you open your mouth to give the client the good news…and halve it. The client doesn’t bat an eyelid…says “fine”, signs up and goes on his way."

Pricing is an art    1 thanks

ejkless | | Permalink

Much to agree with here, save the notion that bookkeepers can't set a fixed price. They can, do and should.

With regard to setting a price, it is an art, not a science. That said, it is certainly not about just guess, but rather discernment. For more, please read Ron Baker's book Implementing Value Pricing.

Tom 7000's picture

two tier system    2 thanks

Tom 7000 | | Permalink

when you start from home the prices are lower because you have no overheads, That way you can attract more clients on a simple supply and demand curve.

When you move to new offices you just keep the old clients on the old rates and double??  the fees for the new ones.

I reckon the average life expectancy of a client is 5 years...youll soon find the old ones have gone and the new ones are the norm.

As you take on (more) staff...that young lady who qualified with KPMG who you have offered a job for wants ...gulp how much??? Up go the fees again but to the new clients.

Then increase ema ll each year by 5% for inflation

Thats what I would do...but then...what do I know ;) 

 

Also the comment about...omg how will I do all this work for £1000/£900....really...you had a job it paid you £40k a year or whatever as apprentice assistant accountant to the blah blah...you can do a £1000 job in 2 days...you cant tell me its not worth doing... well unless you were a partner in PWC or a plc FD...in which case you are doing this for fun now not the money.

 

JCresswellTax's picture

Slightly surprising    1 thanks

JCresswellTax | | Permalink

But this is definitely a good article!  Actually find myself agreeing with most, if not all, of it! :)

Pricing    2 thanks

farrcorfe | | Permalink

Yes, that sounds abut the norm. We are usually afflicted with what is known as 'mental/fiscal drag'. Your head says (say) £1,000 but when you open your mouth £750 comes out!

Pricing

TonyJackson | | Permalink

All very interesting to read but I am really struggling with it!

I have just got my practice licence as an AICB and slowly getting my bookkeeping practice off the ground with some networking events looming........aaagh... so what am I going to charge for a Tax Return or simple accounts for a sole trader? I am operating from London where there is tons of competition I'm sure.

I think I am quite good with meeting people and getting into business discussions but when it comes to the million dollar question........anyone got any ideas for me!!??

Thanks!!

Tony

How bizarre!    1 thanks

Michael C Feltham | | Permalink

How bizarre!

Let's dispel some erroneous assumptions:

 

1.  Your are working from home and can therefore afford to charge less!

Nice idea!

Problem comes when you are compelled by size and practicality to move to an office and then suffer the whole cost gamut of UBR, Insurance, Compliance to the regime of fire, H and S, Disability Access, Staff and Employer's NIC etc etc.

Do you then hike your fees by 25% or more? If you do then clients walk.......

Consider this rather as with VAT: non-registered. Revenue rises above the mandatory registration threshold and then fees escalate, overnight by 20%. OK, VAT registered clients can claim it back; but only (if on quarterly reporting) after > three months......

My advice: exploit your benefit for yourself as long as you can: save for the cost add-ons of that office!

2.   I will charge much less from the outset to build client base:

Why?

You are either worth what "The market will bear": or you are not.

If not, then think of something else to do!

Overall advice on fees:

A. Never, ever quote fixed fees: this is a trap as every job and assignment will suffer hidden costs that soak up billing time. Do you really love working for nothing?

B.  Analyse time and cost; rigorously!

Most small businesses do not: and if one analyses the owner's time, capital sunk and meagre returns, then they would be better off employed, leave the capital earning its expected derisory returns in an ISA and take the paid holidays, time off sick and the other benefits of employment.

C.   Remember it is marketing: you are actually selling yourself, ergo you need a spiffing USP. Therefore think carefully your personal professional strengths and weaknesses; and focus on selling your strengths.

Sell the advantages to the client: a USP based ONLY on the old chestnut "We're the cheapest!" fails every time.

Unless you are Poundshop..............................

 

johnjenkins's picture

When I first started    2 thanks

johnjenkins | | Permalink

the charge out rate to the client was per 6 mins work, including lunch and phone calls. You decide how much you want to earn per hour (productive or not) lets say £50, you then charge client (for work done) £150 per hour. So it's one for the money, two for the show, three to get ready, now go accts. go.

Menu driven pricing    1 thanks

nickja | | Permalink

"There is some clever software available that can help you determine your menu driven prices."

Search as I might, Mark, I can't find any such software.   Do you remember a name or any other clue?

 

I would be interested too    1 thanks

pauljohnston | | Permalink

So Mark please help here.

 

I did look at one company's offereing but we were stuck with its fee rates which were grate for Norfolk but a bit low for us,  see http://quickeasyquote.co.uk/

Kent accountant's picture

@Tom7000    1 thanks

Kent accountant | | Permalink

It's definitely worth doing, for me it was the realisation:

At the start:

1) How low (relatively) accountancy fees are for small businesses - I was out of practice for 16 years and the last company I was FD of had a large five figure audit/accountancy/tax fee.

2) At the start of your practice when you might consider  £1,000 clients the norm, getting enough of them to provide you with the same income you had in full time employment seems a daunting task.

After a while:

3) How much work you can get done in a day working efficiently - a £1,000 job can definitely be done in two days even allowing for admin/CPD/networking etc.

4) How quickly client numbers grow once you have spread the word with your networking, advertising, doing a good job and getting referred.

 

Jason Dormer's picture

Pricing    2 thanks

Jason Dormer | | Permalink

Always amazes me that so many accountants freeze when being asked a price, I think that the issue is so much a bigger one in the accountants head than the potential clients head.

After a short while in practice you ask the questions, you assess the client, the sector, the scope, the volume, the standard, the turnover, the risk, the potential and so on, you have a very good idea of how many hours will be used up and you quote the appropriate fee.  Look the client firmly in the eye and quote with confiendence.  99 times out of a 100 the client will go with you if he is confident with you, and wont quibble on price.  For the 1 that doesn't is it a loss?  Building a practice should be based on quality not quantity.  I'd rather have 100 clients paying £1500 than 150 clients paying £1000!

Poor Article

eppingaccountant | | Permalink

Sorry Mark, I hugely respect you and read your articles with interest but this one does not come to any firm coclusions and does not answer the issue that the article title implies.

When any accountant quotes for fees they should, from their past experience (and this includes working for a firm previously if you are setting up on your own) make a valued judgement of the time invloved based upon the client size, standard of bookkeeping, personality and attitude of the client and so forth and of course the range of services they require.  You then apply your required hourly rate, add on say 10% for contingencies and quote.  In some cases you will slightly under recover in other cases over recover.

As to the argument about under quoting if working from home with low overheads then moving into offices at a future point, I commend Tom7000's comments above.  This is correct. Average client life is say 5 years, keep the former ones on the same rate, start the new ones on a higher rate and in time the former ones will drop out.

In practice I have found that if you are good at what you do, clients are willing to pay more than your original fixed fee quote if they are happy with you and you have built up a good working relationship with them.  We are in the business of selling a service and the majority of clients (not all) are decent people, willing to pay more if you can justify why you are charging more - and finally when you put your fee in writing, be it a "fixed" fee or otherwise, it is best to refer to it as a fee estimate rather than a fee quote.

 

bookmarklee's picture

@eppingaccountant    1 thanks

bookmarklee | | Permalink

Thanks for your opening comment - tho not the title you chose to use. Given the variations in fees around the country I didn't think it would help anyone to suggest specific numbers. You seem to suggest that accountants should sell their services by reference to how long they spend doing the work. I'm afraid we are poles apart. But if your way works for you then it matters not. I doubt many long established accountants would agree with the suggestion (made previously) that typical clients only stay for 5 years. I suspect this is more relevant for start up firms that have yet to work out which clients they really want and who have tried to increase low fees as the practice builds in size.

Pricing is very much a    1 thanks

ireallyshouldkn... | | Permalink

Pricing is very much a function of the type and size of clients you have.

The bigger/messier they are, the more you lean towards time as you have to 'push back' on the client in terms of where the boundaries are and its far more variable. 

The simpler/predictable the more you lean towards fixed/menu pricing.

I tend to fix what I can and go hourly only for the unpredictable elements. Most of what I do is very very small.  I have only 5 or 6 £1million+ t/o business and most of those are really simple.  The majority are £100k t/o small service biz's which are run by one or two people. Fixed fees work a treat for those as you know it will be done inside a day max two. 

 

in the context of    1 thanks

justsotax | | Permalink

a new start up costing is one of the most difficult areas.  Experience will often not help because you are costing based upon your own business plans/expectations and this will inevitably relate to your requirements/circumstances (you may continue to work from home forever...moving to an office is no certainty).  It is also probable that in your previous experience as an employee you will have only done one part of the bookkeeping tax and accounts involved, suddenly you may be required to do all three...something that will make judging the time you will take (and charging accordingly) very difficult...well for giving a fee estimate anyway).

Old Greying Accountant's picture

Get the right software...

Old Greying Acc... | | Permalink

Kent accountant wrote:

It's definitely worth doing, for me it was the realisation:

At the start:

1) How low (relatively) accountancy fees are for small businesses - I was out of practice for 16 years and the last company I was FD of had a large five figure audit/accountancy/tax fee.

2) At the start of your practice when you might consider  £1,000 clients the norm, getting enough of them to provide you with the same income you had in full time employment seems a daunting task.

After a while:

3) How much work you can get done in a day working efficiently - a £1,000 job can definitely be done in two days even allowing for admin/CPD/networking etc.

4) How quickly client numbers grow once you have spread the word with your networking, advertising, doing a good job and getting referred.

... with IRIS a £1000 fee where they have well kept records on a decent book-keeping package should easily feasibly be completed in a day!

Just in the nick of time!

ming_the_reasonable | | Permalink

Thanks for this article. I'm seriously thinking of starting up my own practice and want to get my fees onto the right footing from the start.

I was advised once by a partner of a firm I used to work for to consider what I'd like to earn per hour and then treble it. One third for me, one third for admin time, overhead and unforeseen costs (like phone calls) and one third for profit to bank for future investment (or to keep).

andy.partridge's picture

Only one part of the equation    1 thanks

andy.partridge | | Permalink

ming_the_reasonable wrote:

I was advised once by a partner of a firm I used to work for to consider what I'd like to earn per hour and then treble it. One third for me, one third for admin time, overhead and unforeseen costs (like phone calls) and one third for profit to bank for future investment (or to keep).


Nice idea, and we all want our internal 'hourly rate' to be has high as possible (surely), but you are left with the problem of convincing prospects that you are worth it, especially if another accountant down the road is considerably cheaper. Old fashioned supply and demand theory will win through in the end.